Microsoft overcharged consumers $10 bilion, study says 1-8-99

CBS.MarketWatch.com

WASHINGTON (CBS.MW) --Microsoft has overcharged consumers about $10 billion for Windows in the past three years, the Consumer Federation of America charged Friday.

Based on a analysis of pricing information in internal Microsoft (MSFT)
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documents released to the public during the federal-state antitrust trial now nearing its halfway point, the consumer group said Microsoft is charging from $35 to $45 more for Windows than it would get if the market were competitive. See full study.

"We think the overcharges should be returned to consumers," said Mark Cooper, director of research for the Consumer Federation. He suggested a class-action suit on behalf of buyers of 250 million computers or joint action by the state attorneys general.

On Thursday, another advocacy group, the Citizens for a Sound Economy, released an opinion poll that showed 81 percent of Americans think Microsoft has been good for consumers. See the poll results.

Competitively priced

Microsoft responded to the CFA study by saying its operating systems are competitively priced with its competition, such as Red Hat's Linux, IBM's (IBM)
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OS/2 and Sun's (SUNW)
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Solaris. The company said its operating systems are much better than they used to be.

A key element of the government's antitrust case against Microsoft is the allegation that Microsoft wields monopoly power in the market for operating systems for personal computers. More than 90 percent of PCs sold run on a Microsoft operating system. The operating system tells the computer hardware how to do what the software wants done.

But Microsoft insists that it isn't a monopoly because it hasn't raised prices. In fact, it says giving away the Internet Explorer web browser is good for consumers. The Consumer Federation study tries to deflate Microsoft's claims that its business practices benefit consumers.

Windows costs more

Cooper said operating systems (such as Microsoft's MS-DOS) cost about $19 a copy when purchased with a new computer in 1990, the last year in which the market was competitive. By 1996, Microsoft was charging computer makers an average of $49 a copy for Windows 95, according to evidence. By contrast, prices of non-Microsoft software have fallen 5 percent and computers have dropped more than 10 percent a year.

Current prices that Microsoft charges computer makers for Windows aren't publicly known, although Justice Department lawyers and the judge have access to a Microsoft price database. The database could be made public during the course of the trial.

"This monopoly abuse has been imposed through secrecy," Cooper said at a news conference. "They hide the price in the computer's."

James Love, director of the Consumer Project on Technology (a Ralph Nader organization), said Microsoft is also able to extract monopoly rents on its desktop applications, such as word processing, spreadsheets and email.

Love said most computer users are deprived of the choice of which application software will come with their new computer. Since Microsoft has monopoly power on the operating system, it can force computer makers to preload Microsoft products and not those from Corel or Lotus, he said. And Microsoft can charge discriminatory prices because of its monopoly position, Love said.

The government has charged Microsoft with using unfair business practices, such as predatory pricing, tying and exclusive contracts, to block innovations in computing that could threaten its Windows monopoly.

A 'Microsoft world'

On Thursday, the government neared the end of its case, with questioning of the government's final witness, economist Franklin Fisher of the Massachusetts Institute of Technology. Microsoft will begin its defense next week, starting with another MIT economist, Richard Schmalansee.

During contentious questioning Thursday, Fisher warned of living "in a Microsoft world" unless the judge intervenes to restrain the software giant.

"If Henry Ford had a monopoly, we'd all be driving black cars," Fisher said, his voice rising. "That's not what competition is about. That's not what helping consumers is about."

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